2021 (1) TMI 199 - AT - Income Tax

Addition of payment to an unapproved gratuity fund - According to the ld. DR, the payment made to approved gratuity fund alone has to be allowed under section 36(1)(v) and in this case, the payment was made to an unapproved fund, therefore, it cannot be allowed - when the assessee paid gratuity funds to SBI Life Insurance, Life Insurance Corporation and Star Union Diachi, whether such payment can be allowed or not? - HELD THAT - It is not in dispute that the assessee has actually paid the money. In other words, the money has actually gone out from the hands of the assessee. Therefore, that the money paid towards the gratuity fund would not come to the assessee at any event. Hence, this Tribunal is of the considered opinion that the CIT(A) has rightly deleted the addition made by the Assessing Officer.

Summary

Issues:
1. Addition of payment to unapproved gratuity fund under Income Tax Act, 1961.

Analysis:
The appeal and cross-appeal in this case revolve around the addition of a substantial amount towards payment to an unapproved gratuity fund. The Departmental Representative (DR) argued that only payments to approved gratuity funds should be allowed under section 36(1)(v) of the Income Tax Act, 1961. The DR contended that since the payment was made to an unapproved fund managed by the assessee, it should not be allowed. On the other hand, the assessee's representative argued that the funds were managed by LIC and other third parties, not by the assessee. The representative emphasized that the money had left the assessee's hands permanently and should be allowed under section 37(1) if not under section 36(1)(v). The Tribunal noted that the funds were indeed managed by third parties, as evidenced by the assessment order, contradicting the DR's claim that the assessee managed the funds.

The key issue for consideration was whether the payment made by the assessee to the gratuity funds managed by third parties could be allowed as a deduction. The Tribunal observed that the money had genuinely left the assessee's possession and would not return, leading to the conclusion that the CIT(A) rightly deleted the addition made by the Assessing Officer. The Tribunal referred to previous judgments where similar claims by the assessee were allowed, further supporting the decision to uphold the CIT(A)'s order. Consequently, the Tribunal found no grounds to interfere with the CIT(A)'s decision, leading to the dismissal of both the revenue's appeal and the assessee's cross-appeal.

In a separate order, another member of the Tribunal provided additional clarity on the interpretation of section 36(1)(v) of the Act. Referring to relevant case law, the member highlighted the importance of ensuring that the employer does not control the funds of an irrevocable trust exclusively for employees' benefit. The member criticized the vague reasoning of the Assessing Officer and the lack of substantial reasons provided for disallowing the deduction under section 36(1)(v). Emphasizing the irrevocable nature of the trust and the absence of communicated reasons for non-approval, the member concluded that there was no basis to deny the deduction to the assessee. The decision aligned with the Tribunal's consistent stance on the matter, resulting in the allowance of the deduction for the impugned sum.

Overall, the Tribunal's detailed analysis and interpretation of the relevant provisions of the Income Tax Act, supported by case law and factual considerations, led to the dismissal of the revenue's appeal and the assessee's cross-appeal in this case.